1. 1 | P a g e
Evan Clarence Peter Truong
Financial Services:
Opportunities in
China

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Clarence Consulting
Evan Clarence
EDIS Pty Ltd
Peter Truong
Executive Summary
The objective of this report is to provide an overview of the
Chinese financial services sector and provide insights for
Australian and other foreign firms seeking to enter the Chinese
market. A combination of primary and secondary research was
used to analyse the sophistication of the Chinese financial
services industry and the needs and opportunities within the
emerging Chinese middle class; focussing primarily on wealth
creation and wealth management. It also identifies discrepancies
between supply and demand for financial services, explains the
reasons why those discrepancies exist, addresses the potential
risks and challenges for financial services firms as a basis to assess
entry in the Chinese market, and provides recommendations and
strategies for these firms intended to operate in China.
We initially conducted secondary research on the Chinese
financial services industry, sourcing from various reputable
research sources over approximately three months prior to
arriving in Shanghai where we conducted further primary
research. Whilst in Shanghai we met with individuals from all
levels of eight different financial institutions where we collected
our primary research materials and verified secondary research
materials. We then consolidated and integrated all information
in the final section of this report.
Although care has been taken to ensure the accuracy,
completeness and reliability of the information provided within
this report, you must not rely on information within this report as
an alternative to tailored advice from a suitably qualified
professional. Any individual, company and/or entities seeking to
establish an office, new market entry and/or joint venture should
perform further analysis and due diligence. Different cities,
regions and provinces will have differing legislative requirements
and hence possibly variations in consumer behaviour relating to
financial services requirements. The recommendations are
general in nature and don’t take into account any specific
considerations associated with entities or individuals.

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Content
04 Chinese Savings & Spending Culture
05 Chinese Middle Class
07 Financial Services in China
11 Market Size of Chinese Middle Class
Investors & Investable Funds
12 Regulation & Risk
14 Challenges - Foreign Firms
17 Challenges – Chinese Institutions
18 Opportunities
20 Recommendations – Foreign Firms
21 Conclusion
23 Appendices
25 References

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Chinese Savings & Spending Culture
Chinese culture and society have evolved and
developed very rapidly in the last few decades. This
has resulted in an impressive growth rate in key
economic indicators relative to Australia, UK and the
US (refer to Appendix 1). The statistics highlight the
significant differences in household spending, savings
and attitude to different forms of investments. An
example is household ownership; this is more
important to the Chinese because it is future planning
for their immediate family, parents and
grandparents, relative to western cultures where
owning a home is about the individual preferences
and not the collective future of several generations.
These cultural differences have influenced
the Chinese middle class to be less reliant on personal
debt. Hence, more and more Chinese are saving
rather than spending because they anticipate the
government pension will be inadequate in their later
years. Thus they must invest and look after their own
retirement needs, which involves saving more and
reducing debt. These cultural factors are key
contributors behind the very high personal savings
rates seen in China. At 30% this easily outpaces the
9% seen in Australia and the 4-5% seen in the UK and
USA. This savings mentality also means that
household debt as a percentage of GDP is
substantially lower for China (38%) relative to the
other developed nations, (average 96%). However,
these numbers from China may be distorted due to
dispersion of wealth between Tier 1 cities and lower
tier and rural areas. As a nation debt has quadrupled
since 2007, largely influenced by speculative real
estate, shadow banking and borrowing by corporate
enterprises.
Another important cultural influence and
societal factor in Chinese attitude to investments is
their retirement age. China’s retirement age is 60 and
amongst the lowest in the world. The age was
determined by the Chinese government in 1963, at a
time when life expectancy was 50 years. However,
with rapid rise of healthcare, economic success and
average life expectancy extended to over 70 years
there is increasing pressure for government to re-
evaluate those figures. It is anticipated that by 2050
there would be over 38% of the Chinese population
over 60 years old relative to today’s 15%. (Credit
Suisse, 2015)
These cultural differences have influenced
the rise of the Chinese middle class. The rapid growth
of China’s middle class is bringing huge economic and
social change and will continue to do so into the next
decade. By 2022, research by McKinsey estimates
that more than 75% of the urban Chinese population
will earn between RMB60,000 (US$9,000) and
RMB209,000 (US$34,000). Evidence suggests that
within the expanding middle class, the upper middle
class is set to become the primary driver of Chinese
consumer spending into the next decade. Whilst this
is happening the new generation of globally minded
Chinese will have a disproportionate influence in the
market place.

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Currently 68% of the Chinese middle class has access to the
internet compared to 57% of the total Chinese urban population.
Research indicates that these middle class online consumers are much
more likely to buy digital goods such as laptops, cameras and specialised
household items. Along with the affluent, ultra-wealthy consumers and
upper middle class consumers they are stimulating rapid growth in
luxury-goods consumptions, resulting in annual growth rate of 16% to
20% over the last 4 years. Currently more than one third of the money
spent around the world on high- end luxury goods such as shoes,
handbags, watches, jewellery and clothing come from the Chinese
domestic marketplace.
Chinese Middle Class
The rise of China’s economic success has seen the emergence of
the world’s largest middle class. Their rapid exponential rise would be
considered a phenomenal achievement for any country. The world’s
second largest economy has seen its middle class accelerate to 109
million individuals surpassing the USA’s 92 million middle class. Even
with fears of a global slowdown in the emerging markets, Asia remains
the greatest expansion area of the world’s middle class.
Figure 1 Number of middle class and region.
Defining the criteria for middle class is paramount to
understanding the impact of where new investments in financial services
should be directed. We use the Credit Suisse parameters of middle class,
defined as those with wealth between US$50,000 and US$500,000. The
term wealth is defined as the value of financial assets plus real estate
owned by households, less their debts (Credit Suisse, 2015). Wealth not
income is measured, to avoid temporary changes caused by
unemployment.

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Since 2000, twice as many Chinese as Americans have joined the middle class. Wealth per Chinese adult
have quadrupled to approximately US$22,500. China now accounts for 10% of global wealth whilst containing a
fifth of the world’s population. According to Credit Suisse, China should also experience a 74% rise in the number
of millionaires to approximately 2.3 million by 2020.
Within the middle class, there are different generational segments, the largest of which we will call
Generation 2 (G2). Born during the economic boom time, the G2 consumers are China’s teenagers and those in
their early 20s. Their consumption behaviours are contrary to their parents who were born during the years of
central planning and shortage, where building family wealth and economic security was a priority. The G2s are more
confident, independent minded and determined to display their independence and success through their
consumption. The G2 generation comprised nearly 200 million consumers in 2012 accounting for 15% of urban
consumption and is forecast to rise to approximately 35% by 2022.
Figure 2 – Population Demographics
Source: McKinsey & Company
China is also seeing a rapid shift in the geographic share of their middle class. In 2002, 40% of the urban
middle class lived in the four Tier 1 cities: Beijing, Shanghai, Guangzhou, and Shenzhen. This is set to change by
2022 where the middle class share of those cities is forecast to fall to about 16%. It isn’t cause for concern however,
since the middle class won’t actually be shrinking in those Tier 1 cities, instead the middle class growth rates will
simply be far greater in the smaller cities of the north and west of the country. Many of these high growth regions
are classified as Tier 3 cities, whose share of China’s upper-middle class households should reach more than 30
percent by 2022, up from 13 percent in 2002.

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Financial Services in China
The Chinese financial services industry has
undergone significant changes in the past 10 years
and the transformation is still very much in its infancy.
As the government transitions the industry from
centrally planned to market orientated (Austrade
2014) the industry will face numerous challenges to
adapt, but the long term benefits will be extremely
beneficial for the Chinese economy. Despite ongoing
reforms since its acceptance into the World Trade
Organisation (WTO) in 2001, doing business in China
continues to be challenging as a result of government
legislation and cultural differences in ways businesses
operate. However, companies especially from
Australia face less regulations in China than
companies of most other countries and are provided
greater opportunities for banking, securities and
Funds Management as a result of their country’s
bilateral Free Trade Agreement with China.
Banking
The Chinese banking industry is not too
dissimilar to the Australian banking sector, where the
top 4 banks dominate, accounting for 60.7% of
industry revenue. These 4 institutions; Industrial &
Commercial Bank of China (ICBC); China Construction
Bank (CCB); Agricultural Bank of China (ABC); Bank of
China (BOC); are amongst the top 5 largest banking
institutions in the world (Bhattacharyen 2015). As
government regulations ease, industry rivalry will
increase, potentially forcing domestic banking
institutions to increase efficiencies to compete
effectively. The primary focus for Chinese banks are
servicing the corporate and small medium
enterprises. Figure 3, provides evidence that
corporate deposits account for 50.4% of funds, whilst
36% of funds derived from personal deposits. 56.5%
of these funds are used for short, medium and long
term loans to finance industrial and infrastructure
construction projects.
Figure 3. Banking Products & Services
Source: IBISWORLD - Commercial Banks in China, 2016
Banking products and services primarily cater
for the expansion of State owned or private
enterprises, who are expanding domestically and/or
internationally. This focus has resulted in limited
product innovation for individual investors, hence
product differentiation, diversity and innovation are
lacking in the industry. Retail services, private
banking, deposits, loans, online banking and wealth
management are all very similar and lack
differentiation. This is in contrast to the Australian
financial institutions where product variations,
differentiation and innovation of new products are
diverse and freely accessible for all retail and
wholesale investors. The lack of available products
has limited investment choices for the regular
Chinese population, partially contributing to them
primarily investing in property, cash and shares.

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Competition in Banking
Competition in the banking sector is high despite the top 4 banks
controlling 60.7%. Their prices and product offering are similar due to
government control and intervention, consequently product diversity and
innovation are not a basis of competition. New products require extensive and
lengthy approval processes, unlike developed countries. Outside of the 4 major
banks competition is based on size, channels and network capabilities to service
enterprises and individuals. Most banks will compete and differentiate
themselves on client relationships because most other areas are highly
regulated and controlled.
Domestic Banks have generally been poor in delivering a high level of
customer service, effective marketing campaigns and lack a targeted
segmentation of client base. Hence the private banking areas servicing high net
worth and ultra high net worth customers have been dominated by foreign firms
because they can deliver a skilled and experienced work force to service these
customers. These services however are not widely available to the middle class
or general customers due to the banks inability to service them. With a rising
middle class and approximately 109 million individuals, this is a massive
opportunity for any institution that can deliver the services and capabilities to
this segment. Figure 5 gives you a broad understanding of the competitive
landscape in the Chinese banking industry.
Figure 4 Competitive Landscape of Chinese Banking
Source: IBISWORLD - Commercial Banking in China

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Securities & Funds Management
Stability of the Chinese stock market is critical
for the financial services industry because it
influences investor confidence and impacts corporate
funding. Greater volatility will lessen investor
confidence, translating to less investors participating
in the securities market. The securities and
investment industry is anticipated to grow at an
annual growth rate of 3.6% over the next 5 years to
generate up to $28.5 billion of revenue (IBIS,2015).
The Chinese stock market comprise Shanghai
Stock Exchange (SSE) and the Shenzhen Stock
Exchange (SZSE). Shanghai Stock Exchange was
established in 1990 and is administered by China
Securities Regulatory Commission (CSRC). The SSE
issues two main type of securities:
A-shares – Ordinary shares available for
domestic investors denominated in Yuan. These
shares can be held by foreign investment participants
who hold a Qualified Foreign Institutional Investor
(QFII) licence (refer to Regulation & Risk for definition
of QFII).
B- Shares – Local company shares traded in
US dollars and are open to foreign investors.
The Shenzhen Stock Exchange is also
administered by the CSRC but operates slightly
differently from SSE. SZSE has half the listed
companies of the SSE and trades on 3 boards, main
board, small-medium enterprise board and the
ChiNext board, for growth and innovative companies
(Austrade, 2014). B-Shares are in Hong Kong Dollars.
More recently, further signs of moving
towards an open market was connecting the
Shanghai Stock Exchange and the Hong Kong Stock
Exchange, to allow mainland Chinese and Hong Kong
investors to trade in either markets (Austrade, 2014).
Trading on the exchange is segmented into
four categories; Bonds, Funds, Futures and Stocks.
The Futures trading dominates the market and
includes financial products, industrial and agricultural
products. Equities trading is second with 31.5%. Due
to the infancy of the Chinese markets, Funds trading
accounts for only 0.5%. This can represent significant
opportunities for fund managers to create better
investment products especially investments in
foreign assets.
Figure 5 Trading Activities - Chinese Stock Exchange
Source: IBISWORLD - Securities Exchanges in China
The Fund Management industry is less
developed than other areas in the financial services
industry due largely to previous restrictive
legislations and processes limiting foreign fund
managers from operating freely. This is changing as
reduction in regulations will support the transition to
a semi-market economy.

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Since the establishment of the first Chinese fund management company in 1997, by 2014 there were more
than 91 funds management companies (48 foreign joint ventures and 43 domestic companies) in China. The
government realised that to encourage further institutional investors into funds management they needed to free
up the process further and by July 2014, new rules were established where public mutual funds only need to register
the product with the regulators rather than seek regulatory approval. (Austrade, 2015)
Competition in Securities & Investments Industry
The Chinese securities and investment market is growing and is nowhere near maturity. China’s stock
market is only approximately 25 years old relative to the likes of Hong Kong, United States and Australia, where
their first stock exchanges were established in late 1800s and early 1900s. As the government transitions to this
open market system, many foreign investment and brokerage firms have entered the market and further
competition is expected, however, new entrance will continue but the entry will be slow due to regulatory issues.
The top 4 securities brokerage firms in the industry only account for 19.1% of revenue (IBISWORLD 2015).
Competition in the brokerage industry is intense because they compete on price and commission.
When looking for brokerage firm investors tend to prefer to deal with reputable and reliable institutions
who can deliver high quality service, encompassing software technology, a diverse suite of investment products
and services. Loyalty is very strong in China, hence once an account is established it is relatively difficult to persuade
customers to change if a good rapport and trust has been established.
Figure 6 Competitiveness of Securities Brokerage

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Market Size of Chinese Middle Class Investors & Investable Funds
The Chinese middle class presents the greatest opportunity in the financial services sector at present
because it is a segment that is large, quickly growing, neglected and underserviced. If domestic and foreign
institutions can provide better services, more product innovation, transparency, trust and education, the
opportunities are limitless. We estimate this market size of investors and investable funds as follows:
Market Size Estimate of Chinese Middle Class Investments in Securities
1. Estimate for total number of Chinese middle class
who participate in direct equities investments.
2. Out of these 16.35 million individuals, average asset allocation towards direct shares is 8% of their
household investments, in which we assumed based on the Credit Suisse net wealth criteria.
3. Current estimated size of the middle class investment in direct securities, based on average investable
funds between $4,000 and $40,000 with a Medium of $22,000.
Estimated current market size of middle class investments in direct equities is between USD$65.4 and
USD$654 billion. Most of these investors do not understand how the market operates and/or are not
seeking appropriate advice.
4. If the middle class were more confident and better educated about direct investments, participation rate
may increase to an average of 34% (Medium between Australian, United States and United Kingdom direct
investment participation rate).
Thus if the Chinese middle class participation rate increases from 15% to 34%, the market potential for this segment
is worth between USD$148.24 billion (min) and USD$1.482 trillion (max), average of USD$815.32 billion market
potential (refer to Appendix 6.0 for assumptions). Very little attention and resources have been given to this
segment. Presently, there are over 100 million equities accounts, therefore the estimates above are conservative.
Middle Class (People) 109,000,000
% of People in Securities 15%
No. of Potential Investors 16,350,000
% of Household Investment 8% Investable Funds in Market
Minimum Wealth $50,000 $4,000
Maximum Wealth $500,000 $40,000
Medium Wealth $275,000 $22,000
No. of Investors
Allocated funds Per
Individual
Market Size (USD)
Min Market Size 16,350,000 $4,000 $65,400,000,000
Max Market Size 16,350,000 $40,000 $654,000,000,000
Medium Market Size 16,350,000 $22,000 $359,700,000,000
No. of Investors
Allocated funds Per
Individual
Market Size (USD)
Min Market Size 37,060,000 $4,000 $148,240,000,000
Max Market Size 37,060,000 $40,000 $1,482,400,000,000
Medium Market Size 37,060,000 $22,000 $815,320,000,000

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Regulation & Risk
The Chinese financial system is highly regulated with limitations attached to licensing requirements, quotas
and specific conditions for different purposes. However, this transformation and willingness to transition to an open
market has created opportunities for local and foreign institutions. Two important licenses to be aware of are the
Qualified Foreign Institutional Investor (QFII) and the Qualified Domestic Institutional Investor (QDII). These licenses
are in addition to other regulatory licenses required and issued by China Securities Regulatory Commissions (CSRC).
 QFII is designed to attract financial institutions who are investing in Chinese securities long-term rather than
for short-term speculation and arbitrage trading (Ernst & Young, 2013). This license allows foreign institutions
to invest in the Chinese equity and fixed income products denominated in RMB. Approximately 251 licenses
have been issued with quotas of USD$200.5 billion.
 QDII allows domestic institutions to invest offshore to allow domestic investors access to foreign investments
for diversification of their asset allocation. Regulation however dictates how domestic institutions can invest
on behalf of investor, such as specific quality of investment, types of product and particular financial
instruments. Refer Appendix 2.0 for investment criteria. Over 125 QDII licenses have been issued with over
USD$87 billion of assets.
Understanding Chinese Land Rights
Property acquisition and disposals are in fact transfers of leases between buyers and seller, where actual
ownership belongs to the state and the collective. A land user obtains only the land use right, not the land or any
resources below or on the land. These leases are limited to a prescribed periods based on the usage of the land.
Figure 7 highlights ownership types. Government has the legal right to reclaim any property from an individual,
resulting from public policy consideration and are compensated as a result of expropriation and/or requisition. The
time remaining in the lease agreement can have significant negative and/or positive impacts on the value of Chinese
property and must be clearly understood by investors and financial institutions.
Figure 7 – Lease Terms for land ownership

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China-Australia Free Trade Agreement
The China-Australia Free Trade Agreement
(ChAFTA) secures a wide range of unparalleled
financial services commitments from China for
Australian firms. These commitments include access
for insurance companies, a quicker licensing
approval, increased ownership (from 33% to 49%)
and closer collaboration on regulatory decision
making and transparency. ChAFTA represents
substantial opportunities for Australian financial
services institutions to access a new market which is
large and in the infancy of growth. Appendix 3.0
provides the benefits for Australian insurance,
banking and securities institutions who wish to
establish joint venture partnerships in China.
Limitations on Investment Properties
Arguably, one of the Chinese housing
market's largest problems is excessive government
intervention, greatly exaggerating the housing cycle.
The government has repeatedly stepped in to avoid
over-heating within the sector and then stepped in
again to avoid the resulting slump. Consequently
China's housing market moves from one extreme to
the other, all within the general context of an over-
valued and over-stocked housing market.
There are many regulations surrounding
investment properties in China with the general
consensus being that the regulations are constantly
changing in response to economic conditions within
the local economy. Examples of government
intervention include Shanghai's municipal
government tightening its investment policy by
increasing minimum down payment for a second
home (60% to 70%) and the enforcing of a 2
investment property policy within Tier 1 cities to try
limit speculation.
USD$50,000 per annum Limitation on Forex
China strictly controls inbound and
outbound foreign exchange flows. Chinese citizens
are limited to USD$50,000pa of outbound foreign
exchange. The RMB funds can only be converted at an
approved banking institution, who has the obligation
to review whether the outbound capital is for
investment or for regular payment. Despite these
restrictions many Chinese find ways to bypass these
restrictions by utilising friends and relatives to assist
with outbound money transfer. Businesses however
are allowed regular payments above USD$50,000 if
they submit documentations to verify and
substantiate underlying transactions. Appendix 4.0
details the required documents. These restrictions do
limit access to overseas investment opportunities and
coupled with limited domestic investment options,
many Chinese have simply resorted to saving more
and limiting the use of borrowing.
Special Economic Zones of China (SEZs)
The Chinese government understand the
need to continuously modernise and innovate to
advance China’s economy, hence the establishment
of Special Economic Zones where foreign and
domestic companies are incentivised to work and
collaborate to export and/or import products, ideas
and technology to develop and enhance economic
growth and prosperity for the country. There are 15
Free Trade Zones (FTZ), 32 State-Level Economic and
Technological Development Zones (ETDZ), 53 new
and high-tech industrial development zones in large
and medium sized cities. These incentives range from
special tax treatments, greater independence and
collaborative incentives. Appendix 5.0 outline the
incentives for foreign and domestic institutions.

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Challenges – Foreign Firms
Understanding Guanxi
Guanxi refers to the exchange of ‘favours’ or
‘connections’ that are beneficial for the parties involved. On
occasions these exchanges are based on direct cash exchanges
and are hidden from a casual observer. Guanxi should appear to
be made voluntarily and can help minimise many obstacles to
doing business in China. Whilst Guanxi maybe akin to bribery in
the eyes of the casual western observer it is still very much
practiced within Chinese business culture.
Building Guanxi is a process and cannot be achieved with
a single gift or dinner. Similar to most places in the world and in
any relationship it is important to communicate, spend the time,
show respect and reciprocal politeness in business dealings. At
the same time you have to appreciate that if you are not from
China and don't speak the language there is only so much you can
achieve regarding Guanxi. Regardless of your moral compass, you
have to give gifts in China since it is a way to show respect. Many
foreign companies in adapting to the local culture have drawn
policies for their organisation. For example, some foreign
consulting companies operating in China have the policy to only
give gifts with a company logo or if there is a need to give
something more expensive, something that will represent their
country of origin.
The good news is the Chinese government is pushing a
strong anti-corruption agenda. The new policy to some extent is
creating a level playing field for foreign companies when it comes
to dealing with pure corruption such as direct request for cash. It
is now much easier for businesses to say no due to Chinese
government policy. The government announcements has led to
a dramatic decline in gift giving and lavish spending by
government officials. The measure is working, evident with
international luxury brands such as Diageo and Jacobs Creek,
where demand has noticeably declined in China recently.

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Joint Venture
ChAFTA has given Australian financial institutions significant
opportunities to operate in China with less regulations and capital
requirements. An example is the opportunity for Australian securities
and future companies, who can now hold 49% of any joint venture,
relative to the previous 33%. Selecting a comparable joint venture
partner is paramount for any success in China. Understanding
consumer perception, behaviour and trends towards foreign
institutions is important to this success. Foreign companies seeking
joint ventures should take some of these points into consideration.
1. Finding an established reputable domestic partner is
important because trusted local brands are perceived as safe
and secure. The reputation will increase investor confidence
and provide a loyal customer base. This provides
opportunities to maintain and/or increase operating margins
and revenue without the need to lower fees and commissions
to compete with rivals.
2. Partially or fully state owned enterprises have greater local
support from both investors and regulators. This support
extends to noticeably quicker approval by regulators and
greater acceptance by investors for new products. Frequently
investors choose local over foreign institutions due to the
known benefits of government connectivity.
3. Domestic institutions with experiences in innovative
product development are highly desirable. This is important
because they understand the approval process, which can be
time consuming and lengthy. This knowledge can accelerate
new product development and provide first to market
advantage. New Products and services are desirable by
investors because present offerings are limited with very
little differentiation, lack of service, uninspiring technology
and a limited portfolio diversification choice. Alibaba, a local
institution with disruptive technology raised billions of dollars
from local investors due to these reasons.

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4. Qualified Work Force – There are over 180 million Chinese older
than 60 years of age and most of these and other middle class
investors have very little financial education. Thus, their
understanding of financial instruments are limited and therefore
require some basic education and training. If qualified staff are
lacking, the resulting poor delivery of information and advice will
lead to client dissatisfaction, underperformance and business
outflows.
5. Market research and analytics – Having a good research team is
important because it allows both internal and external decisions to
be made which can generate revenue for both clients and
proprietary trading. Having a dedicated research team is part of the
product offerings of many firms and encourages investors to
understand the bases of recommendation.
6. Establishment of a brand name – Branding is important to
understand in the context of Chinese culture because of the high
regard held for status, trust and reliability. Marketing campaigns
should be specifically targeted to particular segments rather than
blanket marketing. This is important because people associate a
brand with their certain expectations.
7. Chinese people rely heavily on word of mouth and generally trust
their community more than elaborate marketing campaigns and/or
advisers. Convincing an influential individual can translate into
multiple opportunities as that person would recommend your
product and/or services to their immediate circle. These individuals
can be family members, relatives, friends, neighbours, work
colleagues or acquaintances.
These factors will contribute to the success of any joint venture in
China. If local partners do not possess these qualities, the foreign institution
should compensate for these lack of functions. Our primary research
verified many of these points and that local investors do actively seek
reputation, product diversity, domestic institutions and higher returns
when seeking professional advice.

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Other challenges to consider are:
Ensure small companies which you are
engaging have appropriate licenses and they have the
necessary credentials that comply with local
legislation. Not all businesses operate with
appropriate licences.
Patience is important and should not be rushed, as
it can be seen as disrespectful. Chinese culture
encourages small talk to give the parties a better
opportunity to understand each other. Often, the first
meeting is unproductive and is a formality to establish
rapport. So don’t be frustrated if progress is slow
initially.
Understanding the capabilities in a local
partnership is important and should be taken into
consideration in addition to standard financial due
diligence. It is important to understand the financial
complexity of any organisation which you are
partnering, to avoid potential risks such as shadow
banking.
Challenges - Chinese Institutions
For domestic firms, the opportunities are
significant if they are willing to allocate resources to
service more of the middle class. We understand that
limitation through regulation have prevented many
institutions from expanding and deploying offshore
investment strategies. Despite this, we see several
challenges and potential risks for local companies if
they do not become more innovative and specifically
target their middle class. There is a growing risk of
losing customers to new innovative and disruptive
products and companies. Alibaba has clearly
demonstrated that it can be a disruptor to the
financial services sector in China because it is
targeting the middle class segment with new easy to
use financial apps and have been exceptionally
successful in doing so. To the other spectrum, foreign
competition has also dominated the private banking
domain because local institutions cannot deliver the
exceptional service and/or products to compete with
multinational banks. The challenge for local
institutions is to devise solutions and new or
improved offerings to cater for the burgeoning 109
million middle class. If it takes too long to decide
which path to embark, they will lose further market
share to the likes of Alibaba, foreign institutions and
other potential new entrants to the market.
Upskilling and attracting local staff with the
knowledge and expertise to deliver the right level of
service to any customer will also be a challenge and
opportunity. By actively doing so will allow banks to
attract and retain new, innovative and talented
individuals who can help the company to develop
new services, products and opportunities to tackle
the middle class opportunities. Without adequate
training and knowledge about the products on offer,
it is very difficult to generate revenue and compete
on a level playing field.
With increasing debt concerns amongst
corporate institutions, being able to diversify revenue
streams away from the corporate institutions will also
pose longer term challenges.

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Opportunities
There are significant opportunities for Chinese and foreign financial institutions to specifically target the
burgeoning Chinese middle class who have wealth ranging from USD$50,000 to USD$500,000. Presently, this
market segment is under-serviced and not a lot of resources or effort have been deployed to meet their financial
needs. This market is potentially worth $30 trillion dollars (Median Wealth of $275K multiplied by 109 million
people), and yet their main asset allocation is limited to cash related products, direct property and the share
market. We understand that regulations are partly to blame however as these ease significant opportunities will
arise. Some of the likely opportunities within the Chinese financial services sector are for the middle class segment
have been separated below into products, services and innovation categories:
Products
The funds management market is in its infancy and hence there are not a lot of funds available to domestic
retail investors. There are a lot of opportunities for more specialised funds designed to look for opportunities in
mainland China and Hong Kong. These funds could range from Private Equity and venture capital investments for
the more aggressive investor; property trusts for those that cannot afford a home directly; or hybrid securities and
fixed interest funds designed to capture a higher return than the typical cash return. Whilst many of these funds
may exist already, they are likely directed more towards high net worth individuals, private and state owned
enterprises. Giving more of the middle class an opportunity to participate in these investment mechanisms could
be a substantial opportunity for the financial services sector as a whole.
Exchange traded funds is another product opportunity for local investors and institutions alike. Instead of
being exposed to company specific risk, exchange traded funds are a cheap way for investors to diversify their
investment risk and yet be able to trade the fund like a listed entity, subject to liquidity. This will give investors a
basket of investments rather than individual exposures. These funds can compose of any particular asset class,
sectors or industries and can help reduce risk whilst still building long term wealth.
For the more highly educated and young aspiring new affluent generation, derivative related products could
also be an opportunity, however, the market segment may be limited at present because of the complexity of the
instrument, risk involved and education required surrounding this investment instrument. As investors become
more familiar with them over time, derivatives related products will grow substantially.

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Services
With any product launch and investment, there must be extensive education and training to investors about
both the downside risk and upside risk of the investment. There have been a number of fraudulent financial
instruments in China where people have lost substantial savings, especially in P2P investments, which has made
them more conservative and sceptical of some new financial products. It is this reason that any new services and/or
products must be completely transparent, allowing investors to judge the validity of the investment or services on
offer. Being able to provide transparency and tailored services will help to build trusted relationships which will
lead to more financial success for both investors (middle class) and financial institutions.
Superior service can be as simple as keeping the investor informed about their investments, economic
conditions and/or regular contact. Understandably due to the size of the market frequent one on one contact is not
always possible or efficient, however communication efficiencies could be easily derived by streamlining
information messages and channels to cater for the masses. This can be as simple as creating an email distribution
list to provide market updates and information on investment strategies. Whilst this solution may sound logical,
the Chinese middle class are largely ignored and there are definite opportunities for firms to enter this space with
superior service offerings catering for the middle class investor.
With the government slowly transitioning from a centrally controlled financial services industry to an open
market industry it is important that domestic firms try to form strong partnerships and alliances with foreign
institutions to learn more about new products, services and innovations which they can replicate domestically in
China. A good example of the benefits of an alliance is the exchange of staff on both sides to learn about each
other’s businesses. As government regulations ease, the domestic and foreign firms will then be more ready to
launch their new products and services more efficiently to cater for the middle class investors.
Innovation
The financial services industry in China is moving very rapidly. If domestic institutions are not at the
forefront of innovation in their product offering, their market share is likely to decline as government regulations
ease. Developing technology to deliver better services, quicker response time and less human intervention will be
critical to future success, not only from an operational view but more importantly to cater for the increasingly tech
savvy investors, predominately the younger, growing middle class generation. We have seen this with Alibaba, who
have used their reputation from online retailing, popular with younger segment, to launch financial products via an
app catering specifically for their middle class users. Using their Yu’e Bao app as an example, they raised US$90
billion in only 10 months. If local institutions want to continue to dominate they need to be more innovative with
their technology offering and product diversity. Given the relative infancy of the Chinese financial services industry
and the ability to leverage the expertise of more mature foreign firms there are significant opportunities to be had
for innovative companies who enter this space.

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Recommendations - Foreign Firms
Our recommendation for any foreign financial institution who wish to do
business in China, is first understand the culture and the way business is
accomplished before pursuing any forms of negotiation, joint ventures or
partnership. This is critical in understanding how decisions are made and knowing
what is important to your new potential partner and customers. This cultural lesson
will alleviate potential stress when negotiations are slow and decisions are not made
on the day. Understanding Guanxi is paramount and is a starting point.
For large organisations, any strategies involving China would need to
seriously consider their team composition and locations to manage the political
situation and customer expectations. Having a team well connected with Beijing and
likely located within the city, or close to the appropriate political powers and decision
making is quite important. All companies, especially foreign enterprises need to work
closely with government officials to understand all regulatory and legislative
requirements and to ensure smooth approval processes since political discrimination
against foreign firms is not uncommon.
Having a dedicated team responsible for deploying the strategies and general operations encompassing
sales and marketing, product development, finance and distribution is also important, as is their geographic
location. Strategically locating the strategy and operations teams either in Shanghai and/or within the designated
free trade zones in other cities should also be given thorough consideration. As such, having staff located in
different cities such as Beijing and Shanghai is worthy of due consideration since connectedness to political forces
and utilising the benefits of Free Trade Zones within cities close to the customer base are vitally important within
China.
When seeking a joint venture partner in China, foreign firms also need to be careful and selective because
success in China will largely depend on their partner’s reputation and abilities to work with the local and provincial
government and regulators. Failure to perform proper due diligence on a joint venture partner may result in
substantial losses for foreign institutions and substantial gains for domestic firms. It is not uncommon for large
foreign firms to exit China after considerable resources have been expensed. There are examples of foreign firms
deploying their resources to build infrastructure only to later leave the country due to difficulties, allowing the
domestic partner or other domestic firms to acquire the infrastructure at a much cheaper price once the
partnership is dissolved.

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Chinese people are proud of their traditions and history and are very patriotic. Do not discuss political
matters, give negative comments about the country or enforce western business methodology and ideology on
business partners. Tailor your business techniques around local culture, customs and influences. This includes
having flexible business strategies which are adaptable to sudden changes in legislation and which can quickly
respond to changing market conditions. Companies such as eBay have failed and lost substantial amounts of money
(US$100m+) when entering China because they didn’t adapt their global business strategy specifically for the
Chinese market.
Conclusion
The Chinese middle class are proud people who embrace family, education, reputation, trust and wealth
creation as key characteristics on how they live their life. Their decisions are often based on advancing their family
unit and planning for the future. Hence their relationship with others often involves dependency on word of mouth
rather than formal advice from unknown professionals. Our primary and secondary research identified that most
Chinese investors, especially middle class, lack thorough financial education, understanding of financial markets
and/or financial instruments. Thus when their contacts, family, relatives, neighbours and/or acquaintances advise
them to take action, whether to buy or sell investment products, they regularly do so without hesitation. This
creates a herd mentality and chain reactions, leading to greater trading volumes and volatility, as can be evidenced
on the Chinese stock markets and has somewhat caused the perception that Chinese investors are punters.
Therefore, any new products and/or services should focus on educating the consumer about the risks and returns,
provide thorough transparency, have a fast and simple application process and endeavour to build trust and service
levels above the historical norm.
China is transitioning from an industrial and centrally controlled economy to a market driven economy with
an emphasis on services. This is an exciting time as it represents substantial opportunities for both domestic and
foreign companies. Whoever, can implement a clear and consistent strategy which cater for the needs of the
Chinese middle class will undoubtedly reap substantial rewards. Targeting the middle class represents the greatest
opportunities for financial services firms because this segment has been historically underserviced, is extremely
large and growing rapidly. The lack of available services, investment alternatives and lack of knowledge have led
these investors to invest conservatively in standard products like cash deposits, property and limited investment in
shares. If institutions can allocate the appropriate resources to build trust, build innovative products with limited

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risk and educate investors, revenue opportunities could be substantial. The sheer size of the market is so significant
that competition will not necessarily lower prices, provided that institutions can clearly differentiate their offerings
and the benefits of diversification in asset allocation.
Doing business in China will continue to be challenging for any foreign institutions due to cultural and
regulatory limitations. It is important to seriously consider and research a joint venture partnership and conduct
proper due diligence, whilst establishing consistent and proper procedures to address potential conflicts relating
to cultural differences. The saying ‘think global, act local’ holds greater weight for firms wanting to enter and expand
within the Chinese marketplace than in almost any other country.
Clarence Consulting Evolution Diversified Investment Services Pty Ltd
Evan Clarence Peter Truong
+61466315343 +61418223608
evan@clarence.consulting peter.truong@ediservices.com.au

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Appendices
Appendix 1.0 – Country Statistics (2015)
Appendix 2.0 - Restrictions on Qualified Domestic Institutional Investor (QDII) License
Qualified Domestic Institutional Investor (QDII) License
These licenses come with conditions, quotas and limitations to exposure of various products (Austrade, 2014).
 Commercial Banks can only invest in foreign assets with a BBB rating or higher such as fixed income
products, derivatives, structured products, certain equity products. License prohibits the use of commodity
derivatives, hedge funds and any investment below BBB.
 Securities and Investment firms can only invest in pre-approved products associated with deposits, bonds,
property trusts, structured products and derivatives.
 Trust companies are limited to approve cash related products, bonds and derivatives.
Initially the QDII investments were unfavourable with domestic investors because the returns were not as attractive
as domestic cash products, due to the limitations placed on these licensees (JPMorgan, 2008).
Appendix 3.0 - China-Australia Free Trade Agreement (ChAFTA)
Benefits for Australian financial institutions:
Insurance
 For the first time in any FTA, China has allowed Australian insurance providers access to China’s third-party
liability motor vehicle insurance market, without form of establishment or equity restrictions.
Banking
 The waiting period for Australian banks to engage in local currency (RMB) business has changed from 3
years to 1 year. China has also removed the two-year profit-making requirement as a precondition to
provision of local currency services.
 Where a branch established in China by an Australian bank already has permission to engage in local
currency banking business, other branches established by the same bank will be eligible for streamlined
approvals to conduct RMB business.
 There will be the removal of the minimum RMB100 million working capital requirements for branches of
Australian banks operating as subsidiaries in China, facilitating faster growth and new business
opportunities.

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 Australian bank subsidiaries in China are the only foreign bank subsidiaries to enjoy an FTA commitment
guaranteeing their eligibility to engage in credit asset securitisation business provided for under China’s
Financial Institution Credit Asset Securitization Pilot Program.
 Australian banks are now well positioned to benefit as financiers of the expansion in trade in goods and services
from the wide range of market opportunities made available under ChAFTA.
Securities and futures
 For the first time in any FTA with China, Australian financial service providers can now establish joint venture
futures companies with up to 49 per cent Australian ownership (foreign participation was not previously
permitted).
 The extension of national treatment to Australian financial institutions for approved securitisation business in
China.
 Australian securities firms operating in China are allowed foreign equity limits of up to 49 per cent (above China’s
WTO commitment of 33 per cent) for participation in underwriting of domestic ‘A’ and ‘B’ shares as well as H
shares (listed in Hong Kong) and guaranteeing the ability to conduct domestic securities funds management
business.
 Under its Most Favoured Nation (MFN) commitments, China has agreed to confer any future more preferential
treatment for securities providers of other countries to Australian providers. This commitment will protect
Australia’s international competitiveness in this sector into the future.
Funds Management
 China’s allocation to Australia of a RMB 50 billion quota for the first time will allow Australian fund managers to
purchase equities and bonds directly from China’s mainland securities exchanges in Shanghai and Shenzhen.
 China has agreed to guarantee Australian securities brokerage and advisory firms, with access to provide cross-
border securities trading accounts, custody, advice and portfolio management services to Chinese Qualified
Domestic Institutional Investors (Chinese investors allowed to invest offshore).
 The China Securities Regulatory Commission (CSRC) and Australian Securities and Investments Commission
(ASIC) have agreed to strengthen cooperation and improve mutual understanding of Australia’s and China’s
respective regulatory frameworks.
Appendix 4.0 – Verifying foreign contracts for regular payment over USD$50,000
Outbound regular payments above US$50,000 from Chinese companies to international businesses are permitted
however subject to the Chinese company submitting documents verifying the underlying transaction. The
application documents generally include the following:
1. An engagement letter/contract signed between the Chinese party and the foreign company;
2. Notarization and legalization of the engagement letter/contract;
3. Tax return certificates of the international recipient;
4. A request for payment from the international company.
Appendix 5.0 – Incentives for Special Economic Zones in China
The general economic policies of the SEZ’s are as follows:
a) Special tax incentives for foreign investments in the SEZs.
b) Greater independence on international trade activities.
c) Economic characteristics within the zones are represented as "4 principles":
1. Construction primarily relies on attracting and utilizing foreign capital.
2. Primary economic forms are Sino-foreign joint ventures and partnerships as well as wholly foreign-
owned enterprises.
3. Products are primarily export-oriented.
4. Economic activities are primarily driven by market forces.
SEZs are listed separately in the national planning (including financial planning) and have province-level authority
on economic administration. The local congress and governments within the SEZs also have their own legislation
authority.

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Appendix 6.0 – Assumptions for Market Estimate of Middle Class investment in direct equities
Assumptions:
 15% of urban Chinese (middle class) invest in share ownership direct or indirectly. Source: Bloomberg.
 8% average Chinese household allocation to stock market investments. Source: Bloomberg & HSBC.
 109 million Chinese middle class. Source: Credit Suisse Wealth Report 2015.
 $50,000 Min wealth classification to $500,000 Max Wealth allocation with a medium of $275,000. Source:
Credit Suisse Wealth Report 2015.
 Australian Share ownership 36%. Source: Australian Stock Exchange.
 US Share ownership 55%: Source: Gallup Poll -2015.
 UK Share Ownership 12%: Source: Office of National Statistics.
 Average Participation rate for of the 3 country is 34%.
References
CNN Money, Ananya Bhattacharya, 04/08/2015
http://money.cnn.com/2015/08/04/investing/worlds-biggest-banks-china/
UK Office of National Statistics
http://www.ons.gov.uk/ons/rel/pnfc1/share-ownership---share-register-survey-report/2014/index.html
US Gallup Survey: http://www.gallup.com/poll/1711/stock-market.aspx
TOM ORLIK AND FIELDING CHEN, BLOOMBERG INTELLIGENCE ECONOMISTS
http://www.bloombergbriefs.com/content/uploads/sites/2/2015/07/China%E2%80%99s-Equity-Investors.pdf
IBISWORLD
 Commercial Bank of China – Industry Report October 2015
 Securities Brokerage and Transaction Services in China - Industry Report November 2014
 Securities Investment in China – Industry Report December 2015
 Investment and Asset Management in China – Industry Report January 2015
 Securities Exchanges in China – Industry Report March 2015
Austrade – December 2014: http://www.austrade.gov.au/Australian/Export/Export-
markets/Countries/China/Industries/Financial-services
Rodrigo Lluberas, Global Wealth Report, Credit Suisse, October 2015
Professor Kerry Brown, The University of Sydney – Finsia Australia, The Development of Financial Services in
China: The role for Australia, Research report 2014
Ernst & Young, Investing in Chinese Securities Market through the QFII Scheme, 2013
China Securities Regulatory Commission: http://www.csrc.gov.cn/pub/csrc_en/OpeningUp/
Yu’e Bao Wow! How Alibaba is reshaping Chinese Finance

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http://www.institutionalinvestor.com/article/3346365/investors-sovereign-wealth-funds/yue-bao-wow-how-
alibaba-is-reshaping-chinese-finance.html#.VqcZZfl97IU
McKinsey & Company, Mapping China’s Middle Class: http://www.mckinsey.com/industries/retail/our-
insights/mapping-chinas-middle-class
Interviews (names & institutions withheld)
In order to obtain first hand insights and verify our secondary data we conducted interviews with Chinese nationals
in Shanghai of different occupations and involvements within the Chinese financial sector. These interviews
included individuals with the following experience profiles:
● Investment banking.
● Chinese IPO’s.
● Chinese MBA students.
● Big 4 Accounting firm.
● Chief Risk Officer of large Chinese Investment company.
● President of a large Chinese Financial services company.
● Two Chinese interns at a large Chinese bank.
● University professor of Chinese Financial Markets.